Bank Austria Business Indicator:
Following a strong start of the year, a temporary cold front has already arrived from abroad
- Bank Austria Business Indicator falls again in April
- First quarter nevertheless sees stronger performance than fourth quarter of 2007
- Foreign trade will at least temporarily go from economic stimulus to risk factor
- First signs of recovery in the course of 2009
In April Bank Austria's Business Indicator continued the negative trend from last month, falling from 2.8 to 2.6. This decrease was based upon the decline of almost all of the individual components of the indicator's value. Both consumer confidence and market sentiment in the domestic and European industrial sectors have deteriorated. The impact of the unfavourable conditions such as the strong euro and high commodity prices – especially the record high prices for crude oil – is becoming increasingly significant. "At the start of the year the Austrian economy was still experiencing dynamic growth, but now the global economic slowdown has reached Austria and cast a shadow over the economic outlook going forward," says Bank Austria's deputy chief economist Stefan Bruckbauer.
Exceptionally strong performance in the first quarter
The Austrian economy grew robustly in the first quarter of 2008, matching the dynamic growth trend seen last year. "The negative global economic situation did not impact the Austrian economy in the first three months of the year," says Bruckbauer, adding: "In fact, the dynamic over the first three months of the year was slightly higher than at the end of 2007."
The ongoing high level of investment activity and the slight increase in private consumption projected by Bank Austria's economists contributed to economic growth. Despite the persistently high inflation rates of well over 3 per cent, private consumption benefited from the favourable situation on the labour market. "Foreign trade also proved to be a driver of economic dynamic in the first quarter in spite of the global economic slowdown and the strength of the euro," says Walter Pudschedl, an economist at Bank Austria.
Foreign trade expected to do an about-face
The domestic export sector has played an essential role in the dynamic economic performance witnessed over the last few years: It has contributed roughly a third of the high growth rates of over 3 per cent. The deterioration of the global economy and the USD/EUR exchange rate, which is having an adverse effect on exports, have had a delayed effect on the Austrian economy because of the rather limited direct impact of these factors. However, the available indicators now suggest that general market growth will slow and that the competitiveness of domestic companies in terms of price will increasingly suffer under these conditions, resulting in losses of market share. As a result, one can expect to see foreign trade have a negative effect on growth over the course of the rest of the year. "The longer the euro remains at the current high level, the greater the risks will be for the Austrian economy as the export industry starts to clearly feel the impact of this competitive disadvantage," says Pudschedl.
Growth of less than 2 per cent for 2008/2009
Similarly to foreign trade, investment activity will also increasingly be affected by the negative international situation and will lose considerable momentum over the rest of the year. Consumption, in which Bank Austria's economists had seen a great deal of potential to significantly counteract the effects of the global downturn, will provide little additional stimulus due to the high level of inflation that is now expected to last into the autumn, which is longer than originally anticipated. After a strong start to the year, the Austrian economy is already starting to show signs of fatigue. Economic growth will slow considerably in the summer and in autumn, but will receive additional stimulus after that. "If the early indications of a recovery of the US economy are confirmed and there is no additional significant increase in oil prices or substantial depreciation of the dollar, there is a good chance that Austria's economy will return to its potential level of growth in 2009," says Bruckbauer. Nevertheless, the weak business activity that is expected to last into 2009 will prevent the economy from achieving growth of more than 2 per cent over the next year.
This scenario is based on the recovery of the US economy, an oil price of around USD 120, a EUR/USD exchange rate of around 1.55 and the assumption that the financial markets will recover. If these conditions develop differently than expected, Bank Austria's economists suggest that one must anticipate a substantial, sustained slump in the Austrian economy. The risk of such a slump becoming a reality remains high.
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Enquiries: Bank Austria Economics & Market Analysis
Walter Pudschedl, Tel. +43 (0) 50505 ext. 41957